Mar 28, 2016

An Economic, Capital, And Building Perspective On The Current Market

Our recent Orange County outlook, in partnership with HomeAid, gathered a warm room of experts filled with reflections from past years and ideas for 2016. We learned about roadblocks and successes our peers are experiencing and discussed strategies to navigate the current environment. The charity event raised $46,000 for the homebuilding industry’s main philanthropy, HomeAid. Their mission is to fight homelessness and they have placed nearly 250,000 previously homeless people thanks to the generosity of the building industry. To date, Meyers Research has raised over $275,000 in proceeds for the charity. Below are some key highlights from our event.

HIGHLIGHTS

Economic Overview. Our Chief Economist, Kevin Gillen Ph.D., presented on the national economy and the Southern California landscape. Kevin highlighted that the national economy is still recovering. He pointed to different positive macroeconomic indicators that showcase this, including improving consumer confidence, gains in the labor market, and steadily increasing inflation. This recovery, however, is starting to exceed the time of a normal expansion period; only three business cycles historically have been longer than the one we are in. The majority of national economists predict the next recession will come in 2018, though it is expected to just be more of a slowdown as opposed to the last crash we experienced.For the Southern California housing market, real estate has yet to fully recover, even though we are five to six years into the recovery. Here are some of the reasons for the nascent recovery (and they all come back to price):

Limited land supply. It’s no surprise that premium locations in California are short on land, but the inelastic land supply contributes tremendously to the supply/demand imbalance in the region, driving up home prices.

Rising construction costs. Another factor pushing up prices is rising construction costs. Cited for years as a headwind to homebuilders, rising costs (in both labor and materials) makes it harder for builders’ deals to pencil. One bright spot is the lower cost of oil and gasoline.

Prices are outpacing wage growth. California’s homeownership rate is historically lower than the national figures, but rapid price appreciation experienced in the market over the past few years exacerbates the issue. Wage growth has been steady in California, but hasn’t been able to keep pace with rising prices. At the peak of the boom, California’s homeownership was 60% and today it’s down to 55%.

New homes are becoming an elite good. Coastal California new home prices are significantly above their previous peak, driven by the aforementioned higher costs of development and limited new supply. Prior to the recession, the price premium of new homes over existing was declining, but the spread has been steadily growing for seven to eight years. Existing home prices are around previous peak levels, but relative to the price of new homes, they seem like an affordable option.

Looking past the headwinds, 2016 will still be a decent year; we should continue to see GDP growth, price appreciation, and job growth, but at a slower rate.

Capital session. Moderated by Jeff Meyers (President of Meyers Research), the capital session with Dan Hanson (Executive Vice President National Production at imortage), Tom Orradre (Managing Partner at Isles Ranch Partners, LLC), and Connie Emmitt-Stern (Executive Vice President of Investments at The Resmark Companies) discussed the opportunities they see at this point in the cycle. Consensus was that home price appreciation is still occurring in highly desirable locations, but overall has moderated compared to the past few years. The market isn’t telling them to be aggressive this year, rather to monitor margins closely and get disciplined with their investments. The potential for pent-up household formations to unleash over the next few years is a big source of confidence, but a dearth of inventory could interfere. The panelists were asked what their top market picks are and the group came up with Phoenix, the Bay Area, Orange County, Texas, San Diego, and Los Angeles.

Building session. Tim Sullivan (Practice Leader of Meyers Research) moderated a homebuilding session with panelists Jeff Roos (Regional President at Lennar Homes of California), Bert Selva (President and CEO of Shea Homes), and Frank Suryan (Chairman and CEO at Lyon Living). In the Orange County rental market, they believe rents have topped out due to an oversupply. With Millennials delaying major life events (getting married, having kids, buying a home, etc), the way people rent and live in an apartment has changed dramatically and developers need to figure out ways to keep up with the shifting preferences. They discussed how slowing absorption rates in the Orange County for-sale market also have to do with an over-saturated market (though some stats show this is more related to a slowing number of international buyers). The panel finished with how the builders are positioning themselves for a downturn in 2017/2018. Their strategies included growing conservatively, looking at deals on a shorter timeline, keeping relationships with patient capital, continuing to improve and stay ahead of the game, and not getting greedy.

Thank you to our sponsors and to all the attendees for the support! Our next event in partnership with HomeAid America will be in Atlanta in October. Stay tuned for updates.